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Japan’s Fiscal Dilemma

Soon after announcing his intention to pay for the planned increase in Japan’s defense budget by raising taxes, fierce opposition, including from his own party, forced Prime Minister Fumio Kishida to backtrack. But, to protect future generations, Japan must maintain fiscal prudence rather than continue to amass debt.

TOKYO – Japanese Prime Minister Fumio Kishida recently unveiled an ambitious plan to double the country’s defense budget to ¥43 trillion ($330 billion), roughly 2% of Japan’s GDP, over the next five years. Notably, the country’s massive rearmament program, its biggest since the end of World War II, has not triggered a political or public backlash. With Japan facing multiple security threats, including North Korean missile tests, Chinese coast-guard ships encroaching on its territorial waters, and Russia’s militarization of the disputed Kuril Islands (known in Japan as the Northern Territories), polls show public support for the proposed increase.

But the question of how Japan will pay for this massive military build-up has been the subject of intense controversy. Kishida initially planned to fund the spending increase by raising taxes and asked members of his Liberal Democratic Party (LDP) to devise a detailed plan. The plan they produced included higher taxes on personal incomes, corporate profits, and tobacco. But it did not include a much-needed increase in the rate of value-added tax (VAT), commonly known as the consumption tax, and was projected to fall short of covering the costs of the proposed budget increase.

Kishida was ultimately forced to postpone key parts of his plan to the next fiscal year after confronting a public outcry and fierce opposition within the LDP. The internal revolt was led by supporters of Kishida’s predecessor, the late Abe Shinzō, who was assassinated in July 2022. Abe loyalists, like Economic Security Minister Sanae Takaichi, argued that the defense budget increase should be financed by issuing new government bonds, in line with Abe’s economic agenda.